Obama budget sees $1.75 trillion deficit

February 26, 2009 5:18:33 PM PST

WASHINGTON --

President Barack Obama charted a dramatic new course for the nation Thursday with a bold but contentious budget proposing higher taxes for the wealthy and the first steps toward guaranteed health care for all -- accompanied by an astonishing $1.75 trillion federal deficit that would be nearly four times the highest in history.

Denouncing what he called the "dishonest accounting" of recent federal budgets, Obama unveiled his own $3.6 trillion blueprint for next year, a bold proposal that would transfer wealth from rich taxpayers to the middle class and the poor.

Congressional approval without major change is anything but sure. The plan is filled with political land mines including an initiative to combat global warming that would hit consumers with considerably higher utility bills. Other proposals would take on entrenched interests such as big farming, insurance companies and drug makers.

Obama blamed the expected federal deficit explosion on a "deep and destructive" recession and recent efforts to battle it including the Wall Street bailout and the just-passed $787 billion stimulus plan. The $1.75 trillion deficit estimate for this year is $250 billion more than projected just days ago because of proposed new spending for a fresh bailout for banks and other financial institutions.

As the nation digs out of the most serious economic crisis in decades, Obama said, "We will, each and every one of us, have to compromise on certain things we care about but which we simply cannot afford right now."

Signaling budget battles to come, Republicans were skeptical Obama was doing without much at all.

"We can't tax and spend our way to prosperity," said House GOP leader John Boehner of Ohio. "The era of big government is back, and Democrats are asking you to pay for it."

Obama plans to move aggressively toward rebalancing the tax system, extending a $400 tax credit for most workers -- $800 for couples -- while letting expire President George W. Bush's tax cuts for couples making more than $250,000 a year. That would raise the top income tax bracket from 35 percent to 39.6 percent for those taxpayers and raise their capital gains rate from 15 to 20 percent as well.

Thursday's 134-page budget submission, a nonbinding recommendation to Congress, says the plan would close the deficit to a a more reasonable -- but still eye-popping -- $533 billion after five years. That would still be higher than last year's record $455 billion deficit.

And the national debt would more than double by the end of the upcoming decade, raising worries that so much federal borrowing could drive up interest rates and erode the value of the dollar.

Also, to narrow the budget gap, Obama relies on rosier predictions of economic growth -- including a 3.2 percent boost in the economy next year -- than most private sector economists foresee.

There is already resistance from Democrats who are upset with the budget's plan to curb the ability of wealthier people to reduce their tax bills through deductions for mortgage interest, charitable contributions and state and local taxes.

That tax hike would raise $318 billion over the upcoming decade toward a down payment on Obama's high-priority universal health care plan. Cuts to the Medicare and Medicaid federal health programs would supply an additional $316 billion, but that still wouldn't provide enough money to guarantee coverage for all, and Obama wants Congress to come up with hundreds of billions of dollars in additional hard-to-raise revenues to pay for the rest.

Then there is the proposed clampdown on the Pentagon budget, which would get a 4 percent boost, to $534 billion next year, but would then get increases of 2 percent or less over the next several years. Domestic programs favored by Democrats would, on average, receive a 7 percent boost over regularly appropriated levels -- even as many agencies are already swimming in cash from the just-enacted economic stimulus plan.

Taken together, Obama's plan contains so many difficult-to-digest ideas that it's virtually certain to be significantly redrafted during debates later this year.

"It's going to be a tough row to hoe, but he has large Democratic majorities and a lot of popular support and we're in times of crisis," said Robert Reischauer, president of the Urban Institute. "So his prospects of him getting much of what he is seeking, while not good, are higher than ... we've seen in the past."

Senate Budget Committee Chairman Kent Conrad, D-N.D., predicted Congress would pass much of Obama's plan, though with significant revisions. For instance, he's unimpressed with a proposal to reduce payments to farming operations with sales above $500,000 per year and says the plan to curb tax deductions for the wealthy faces uncertain prospects because of opposition from lawmakers from high tax states and universities whose endowments have shrunk.

A plan to devote up to $250 billion to support as much as $750 billion in increased spending under the government's rescue program for banks and other financial institutions landed with a thud.

Republicans scoffed at the idea that Obama's plan calls for much sacrifice on the spending front, citing the big increases for many agencies. they also pointed to tax increases and hundreds of billions in revenues from a contentious proposal to auction off permits for carbon emissions in a bid to address global warming.

Obama and top aides emphasized that they didn't make the financial mess.

Said the president: "We cannot lose sight of the long-run challenges that our country faces and that threaten our economic health -- specifically, the trillions of dollars of debt that we inherited, the rising costs of health care and the growing obligations of Social Security."

"For too long, our budget has not told the whole truth about how precious tax dollars are spent," he said. "Large sums have been left off the books, including the true cost of fighting in Iraq and Afghanistan. And that kind of dishonest accounting is not how you run your family budgets at home. It's not how your government should run its budgets either."

Among the many programs that would receive generous boosts are education and cancer research. The size of education Pell Grants would automatically increase every year by inflation plus 1 percent, while Obama promises to double cancer research over several years. He also wants to put the United States on a path to double foreign aid.

Obama's budget contains almost $1 trillion in tax hikes over 10 years on individuals making more than $200,000 and couples earning over $250,000. About $350 billion more would be raised through a variety of other hikes, including raising taxes on hedge-fund managers by taxing their compensation as income rather than at the 15 percent capital gains rate. Obama would also increase taxes on corporate income earned abroad.

Some $526 billion in revenue from carbon pollution permits would be used to extend the "Making Work Pay" tax credit of $400 for individuals and $800 for couples beyond 2010 as provided in the just-passed economic stimulus bill.

The budget would make permanent the expanded $2,500 tax credit for college expenses that was provided for two years in the just-passed economic stimulus bill. It also would renew most of the Bush tax cuts enacted in 2001 and 2003, and would permanently update the alternative minimum tax so that it would hit fewer middle- to upper-income taxpayers.

Obama's $634 billion head start on expanding health care could easily double as lawmakers flesh out details in coming months on how to provide medical coverage to all of the 48 million Americans now uninsured while also trying to slow increases in costs. Health care costs now total $2.4 trillion a year and keep rising even as the economy is shrinking.

Thursday's submission was an overview of a more comprehensive plan that will be submitted in April.